COLLECTED WISDOM™ on 401k Hardship Withdrawals
This archive contains not only the most current material on the topic, but also older items that are still relevant, provide background, perspective or are germane to the topic.
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Hardship distributions are a valuable component of many 401k retirement plans. They encourage participation in the plan and provide a sense of security to participants as they seek a balance between retirement savings and current financial needs. But plan sponsors need to know the rules and administer hardship withdrawals carefully.
Abstract: A good basic overview on the issue and rules.
Abstract: New substantiation guidelines for safe harbor hardship withdrawals have been issued by the IRS. The guidelines made it clear that hardship withdrawals must be substantiated with the proper form of documentation to be a valid distribution, so employers and third-party administrators must understand the guidelines prior to approving hardship distributions.
Source: Lindquistcpa.com, November 2017
Abstract: In these difficult economic times, more participants are considering the option of taking a hardship withdrawal. A participant can only take a hardship withdrawal if it is permitted by the plan and they have an immediate and heavy financial need. This checklist can be used when faced with the task of reviewing and approving hardship requests.
Source: Consultrms.com, November 2017
Abstract: The IRS released a Memorandum to its agents setting forth the substantiation they should expect to see for 401k plan hardship distributions issued. The IRS agents were instructed to examine source documents if they are obtained by the employer or third-party administrator, OR to examine the summary of documentation that the hardship distribution recipient will maintain.
Source: Belfint.com, August 2017
Abstract: Many employers contract with a third-party administrator or platform vendor to administer the hardship application and approval process. But, even if outsourced, employers are the ones at risk of tax liabilities or plan disqualification if the process is not consistent with the very limited authority for early distributions on account of hardship contained in the Code and related regulations.
Source: Frostbrowntodd.com, August 2017
Abstract: Although many providers have used online, participant self-certification to process hardships, serious questions remain whether this process is adequate and the employer, not the provider, remains responsible for any improper hardships. Recent changes to IRS audit guidelines for its examiners indicate the IRS may be more flexible than in the past if certain notice and documentation requirements are met.
Source: Wnj.com, July 2017
Abstract: The IRS recently issued two pieces of long-awaited guidance to facilitate qualified plan operations. The first was the issuance of proposed regulations that would permit forfeitures to be used to fund safe harbor contributions and other corrective contributions. The second was the issuance of new audit procedures regarding the substantiation of hardship distributions, which permits a method of substantiating hardship distributions without having to review and retain the underlying support documentation to show the immediate and heavy financial need for a safe harbor hardship distribution. The new guidance is summarized in this article.
Source: Groom.com, June 2017
Abstract: The IRS recently issued an internal memorandum providing guidance to its employee plans examination group on the substantiation requirements for hardship distributions from a section 401k plan. If your 401k plan recordkeeper has not talked to your company lately about hardship distributions documentation, it may be time to reach out to the recordkeeper.
Source: Erisapracticecenter.com, May 2017
Abstract: Plan sponsors may also elect to add a "hardship withdrawal" option for employees in their 401k or 403(b) plan. This is an optional provision that must be outlined in the plan document before it is available to the participants of the plan.
Source: Benefit-resources.com, April 2017
Abstract: The IRS has released audit guidelines which provide a roadmap for employers to demonstrate that they are properly handling hardship distributions.
Source: Relius.net, April 2017
Abstract: Employees no longer routinely have to provide their employers with documentation proving they need a hardship withdrawal from their 401k accounts, according to the Internal Revenue Service (IRS). Employees do, however, need to keep source documents, such as bills that resulted in the need for hardship withdrawals, in case employers are audited by the IRS, the agency said.
Source: Shrm.org, April 2017
Abstract: This is a list of specific documents that the employer must collect based on each type of hardship. The employee must keep these documents available for the employer at all times.
Source: Castlerockinvesting.com, March 2017
Abstract: After an extended period of uncertainty about what constitutes acceptable substantiation of a hardship withdrawal request, new guidelines for IRS examiners provide clarity. While traditional means of gathering source documents continue to be acceptable, the new guidelines set forth requirements that allow plans to use a summary of those documents instead.
Source: Conduent.com, March 2017
Abstract: Should your 401k plan ever come under audit by the IRS, your documentation will be critical to a swift resolution of the examination. This article covers hardship distribution best practices which can also serve as a helpful checklist.
Source: Bsllp.com, March 2017
Abstract: 401k Hardship Distribution regulations provide that certain safe harbor distributions will be deemed to meet the "immediate and heavy financial need" requirement (for example, deductible medical expenses); however, plans are required to substantiate that the distribution meets the requirements for the specific type of safe harbor distribution.
Source: Bradley.com, March 2017
Abstract: Many plan sponsors and third-party administrators limit hardship distributions to the safe harbor reasons so as to avoid a "facts and circumstances" review of a hardship request, but the safe harbor rules to avoid such review include more than simply restricting hardship distributions to the safe harbor reasons. Errors involving hardship distributions are among the top ten compliance issues found by the Employee Plans Team Audit Program of the IRS.
Source: Aon.com, March 2017
Abstract: This memorandum sets forth substantiation guidelines for EP Examinations employees examining whether a 401k plan hardship distribution is "deemed to be on account of an immediate and heavy financial need" under safe-harbor standards.
Source: Irs.gov, February 2017
Abstract: The IRS has published new examination guidelines for documenting a hardship distribution. Specifically, the memorandum sets forth substantiation guidelines for EP Examinations employees examining whether a 401k plan hardship distribution is "deemed to be on account of an immediate and heavy financial need" for safe harbor distributions.
Source: Asppa.org, February 2017
Abstract: Requests by 401k plan participants to take hardship distributions from their accounts can turn into an administrative hardship for HR plan administrators, but there are ways to make handling these requests work, both for employees and benefit managers.
Source: Shrm.org, October 2015
Abstract: Article addresses two ways participants might empty their retirement asset pool and steps that a plan sponsor can take to help prevent participants from negatively affecting their retirement readiness. The two ways are: hardship distributions and distributions after a participant separates from employment.
Source: Pension-Consultants.com, October 2015
Abstract: The IRS recently warned plan sponsors that plans may not authorize hardship distributions based on self-certification of hardship needs by participants. The agency also reminded plan sponsors that it is ultimately their responsibility to ensure that their plans are being administered properly, even if they outsource defined contribution plan recordkeeping to a third-party administrator.
Source: Towerswatson.com, June 2015
Abstract: At the present time, it may be impossible for many recordkeepers to transfer the hardship and loan documentation in electronic format to the plan sponsor. But every plan sponsor should probably request it from the recordkeeper and request that the electronic data be transmitted to the plan sponsor with each future hardship distribution and each participant loan.
Source: Benefitsbryancave.com, May 2015
Abstract: The Internal Revenue Service recently issued a publication about appropriate documentation retirement plan sponsors should keep for participant hardship and loan requests. Some industry groups and providers say a recent IRS publication goes against prior guidance, but experts at the ASPPA Virtual Conference disagree.
Source: Plansponsor.com, May 2015
Abstract: Most sponsors of defined contribution plans rely on a third-party administrator to handle participant loans and hardship withdrawals -- typically through the TPA's website. However, in guidance issued last week, the IRS cautions that the sponsor -- not the TPA or the participant -- is responsible for maintaining documents proving that those transactions comply with the law.
Source: Benefitsinbrief.com, April 2015
Abstract: Does your U.S. retirement plan make distributions to foreign persons? If so, you must generally withhold 30% from a plan distribution paid to a foreign payee unless you can reliably associate the payment with valid documentation that establishes the payee is a U.S. person or a foreign person entitled to a rate of withholding lower than 30%. Here is an overview of the rules.
Source: Irs.gov, April 2015
Abstract: The government is concerned about the problem of leakage from employer-provided retirement plans, and hardship withdrawals are a big sources of leakage. As a result, it appears the Department of Labor and IRS may be cracking down on plans that do not follow strict requirements for authorizing permitted hardship withdrawals.
Source: Benefitspro.com, February 2015
Abstract: Hardship distributions are a valuable component of many 401(k) plans, but authorizing plan distributions that do not satisfy the IRS hardship requirements can result in plan disqualification and adverse tax consequences for the participants and the plan sponsor. This article is a close-up look at the rules concerning hardship distributions.
Source: Markleyactuarial.com, October 2014
Abstract: One of the six 401k hardship withdrawal safe harbor reasons is for casualty losses to a participant's principal residence. Since this is a relatively recent addition to the safe harbor reasons, and because there seem to be more and more storms causing damage to principal residences, it's a good time review and understand the subject.
Source: Mhco.com, May 2014
Abstract: It's natural to feel bad when someone is in need. However, authorizing a plan distribution that does not meet the requirements can disqualify the entire plan and lead to adverse tax consequences for plan participants and for the plan sponsor. It is important for sponsors to understand the hardship rules and to have procedures in place for making distributions and documenting a participant's need in a manner that will satisfy the IRS in case the plan is chosen for examination.
Source: Kravitzinc.com, January 2014
Abstract: Retirement plans are not required to provide hardship distributions. However, many profit sharing plans, including 401k plans, do. If a participant in a plan with a hardship provision has an immediate and heavy financial need, and the need matches the plan’s definition of hardship, the participant may be eligible for a distribution. Here is an overview of the rules and some compliance tips.
Source: Unitedretirement.com, December 2013
Abstract: This is 23 slides prepared by the IRS, and used at the 2013 Nationwide Tax Forum, which provide an overview of 401k loan and hardship withdrawal regulations. Topic include: tax rules for plan loans and hardship distributions, tax consequences, loan defaults, and prohibited transactions.
Source: Irs.gov, November 2013
Abstract: The IRS announced that it will allow taxpayers who have been adversely affected by Hurricane Sandy to take hardship distributions or loans from their retirement plans (Announcement 2012-44). To qualify under the announcement, hardship distributions made on account of a hardship resulting from Hurricane Sandy must be made on or after Oct. 26, 2012, and no later than Feb. 1, 2013.
Source: Journal of Accountancy, November 2012
Abstract: Today, more and more participants are requesting hardship distributions from their 401k plans in an effort to make ends meet. While you no doubt want to comply with their requests, you don't want to do so to the detriment of your plan. It's critical to understand what the law allows and to review your plan's hardship distribution procedures in order to avoid the headaches that will result from impermissible hardship distributions.
Source: Chang, Ruthenberg & Long PC, May 2012
Abstract: In a sample of seven large defined contribution (DC) plans, blacks and Hispanics were more likely to take a loan or hardship withdrawal than whites or Asians. Yet the fraction of savings "at risk" through loans was only slightly higher for blacks and Hispanics and, in the case of hardship withdrawals, was actually lower for blacks.
Source: Vanguard, April 2012
Abstract: Many who remain employed turned to their retirement plans and a hardship withdrawal to help ease their financial burdens. As this trend continues, it is important for both those working with participants, as well as participants themselves, to be fully aware of what is at stake when hardship withdrawals are considered.
Source: Milliman, March 2012
Abstract: Hardship distributions are allowed in 401k and 403(b) plans only when specific criteria are met. The IRS specifies that the distribution is required to satisfy a financial need that is characterized as "immediate and heavy." This article provides an overview of the rules.
Source: WithumSmith+Brown PC, February 2012
Abstract: This is a sample participant hardship request form.
Source: Plan Design Consultants, January 2012
Abstract: Among plan participants who took some type of savings action during Q3 2011, 72% took a positive action (started or increased contributions), Bank of America Merrill Lynch reported.
Source: Planadviser.com, November 2011
Abstract: Negative behaviors such as using the 401k plan as an emergency fund instead of a long-term retirement savings account and taking excessive loans and hardship withdrawals is a symptom of a bigger problem among the employee population. The same is true for impulsive investment decisions that could ultimately delay employees' retirement. A combination of plan design and financial education works well to improve employees' financial wellness by casting a wider net in order to help employees help themselves without feeling pushed.
Source: 401khelpcenter.com, October 2011
Abstract: Data widely reported in the industry media on loans and withdrawals from 401k plans have generated quite a buzz among plan sponsors. Some reports in recent months characterized participant loan and withdrawal activity as being at "record levels." However, a Vanguard analysis of loans as well as in-service and hardship withdrawals tells a different story.
Source: Vanguard, December 2010
Abstract: Hardship distribution provisions in 401k plans used to be one of those matters on which plan sponsors didn't spend a whole lot of time. But because of the economy, that's not the case anymore. As a result, two points of view about hardship distributions have evolved.
Source: Employee Benefit News (free registration may be required), February 2010
Abstract: There are three ways that cash can be taken out from a 401k account: A regular 401k loan, hardship or non-financial hardship withdrawal. Each is explained in this article with the applicable provisions.
Source: Istockanalyst.com, November 2009
Abstract: This FAQ is provided by the IRS as a general guide and overview regarding hardship distributions from 401k plans.
Source: IRS, April 2009
Abstract: Hardship distribution provisions in 401k used to be one of those retirement plan matters on which plan sponsors didn't spend a whole lot of time. Lately, however, that's not the case.
Source: Retirement Plan Blog, April 2009
Abstract: Hardship withdrawals from Vanguard DC plans rose in 2006 and 2007, although the absolute level of withdrawals is still quite low. The increase may be correlated with either the emerging home mortgage crisis or broader economic stress among financially vulnerable plan participants.
Source: Vanguard Center of Retirement Research, April 2008
Abstract: Some companies offer hardship withdrawals in lieu of loans against the retirement plan. Typically, the withdrawal is processed after the employee requests it with no questions asked. So, how can education be used as a gatekeeper and to help employees become aware of the pitfalls and their alternatives?
Source: Financial Finesse, December 2005
Abstract: If you're in a financial pinch, you might be able to tap your 401k for a bailout -- but it could really cost you.
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